TUC Warns that UK Households are “Running on Empty” as Debt Levels Rise

We are now in an Economic “Danger Zone”

The Trades Union Congress (TUC) has warned the government that surging household debt levels are pushing the UK economy into a “danger zone”.

The average amount of unsecured debt per household stood at £13,200 in 2016, a mere £100 below the record levels reached in 2007 which heralded the 2008 financial crisis. These types of debt include credit card debt and store cards, as well as payday loans debt, car, student, and bank loans. Store cards especially seem to be growing in popularity as a means of borrowing.

Martyn James, from the online complaints service, Resolver, suggests that these cards have been a particular problem. Their introductory offers incentivise customers to spend, but interest rates tend to be higher than traditional credit cards. The use of these cards too, though, has been on the rise- reaching £61.1 billion in May. Consumer debts such as these rose by an astonishing £1.6 billion in March of this year alone.

This debt has meant legal trouble for many. In the first three months of 2017 alone, 300,000 county court debt judgments were made against consumers, up 35% from the previous year. Worryingly, the TUC predicts that debt levels will continue to rise in coming years, reaching an average of £15,000 by 2020.

The TUC’s General Secretary, Frances O’Grady, has also urged the UK government to “deliver the higher wages Britain needs for sustainable growth.” The Bank of England has also expressed concern at these statistics, and the fact that consumer spending is being underpinned by a bubble of debt. At times, this bubble even extends to repaying original debts by taking on new ones, through Debt Consolidation Loans.

The Causes

The TUC blame these high levels of personal debt on the stagnating wages of recent years- fallout from the 2008 financial crash. The crash continues to affect UK workers, as wages which are out of step with rising living costs leave many consumes with a gap in their funds.

These gaps, it seems, are often being plugged with debt. A study carried out by Shelter and YouGov in April of this year found that one in three tenants in low paying jobs were resorting to borrowing money in order to pay rent. Lending sources ranged from credit cards, to overdrafts, to payday loans.

On top of this, inflation rates currently stand at 2.7%, after reaching a four year high in May. On the other hand, wage rises are falling behind, sitting at 2%. Today’s wages are worth £20 a week less than they were in 2006 in real terms, so it’s no wonder that many are struggling to meet living expenses without borrowing. Perhaps the worst off in terms of pay rises are those working as public servants, whose year on year pay increase has been capped at 1% until 2020.

The lack of spending power on the part of consumers has led to many taking on unsecured debts in an attempt to make ends meet. Payday loans companies are flourishing in this challenging environment, and are themselves facing a share of the blame for personal debt levels spiralling out of control. Reasons for borrowing vary, but a surprising amount of people are using these loans for basic living expenses.

The short term loans broker, Readies, carried out a recent poll of 8,000 customers, and found that a surprisingly high 15% of borrowers were seeking these loans in order to keep up with rent or mortgage payments.

Of its customers in employment, 27% reported working in public sector jobs, reflecting the particular financial difficulties this group currently faces. The fact that these types of loans are being used to cope with living costs on such a regular basis highlights the real discrepancy between average wages and living expenses.

TUC’s Recommendations

Frances O’Grady has suggested that the current “bubble” of personal debt seriously needs to be reduced before it “bursts”. She referred to the “millions of families running on empty”, because “wages haven’t recovered”.

O’Grady recommends the UK government boost the minimum wage, as well as ending restrictions on public sector pay rises.

The TUC believes that the upcoming Queen’s Speech is an ideal platform for assuring the British public that their concerns are being tackled. “It would be excellent if the government in the Queen’s speech committed to helping households who are struggling with debt” he said, referring to this debt as “one of the great problems of the time”.

Meanwhile, many debt advisors are urging the Conservative party to introduce the scheme proposed in its manifesto for shielding those in serious debt from interest and other charges, as well as preventing creditors from contacting them. With better wages, both organisations hope, families will become less dependent on loans and credit to manage from month to month.

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